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Contract Governance: a missing link for improved business performance


Formal, institutionalized corporate governance is a relatively recent concept and still maturing, yet few today would suggest it is unnecessary.

Given this fairly recent focus, it is perhaps no surprise that contract governance is some way behind in gaining executive (and regulatory) attention. Yet arguably, the institutional management of an organization’s trading practices and relationships is just as important as the management of its internal relationships and controls. That is why it must become an area for serious focus and improvement.

Not entirely new

Just 10 years ago, Oliver Williamson was awarded the Nobel Prize for Economics, recognizing his work on transactional costs within contracting. Thirty years before, he had written a seminal paper on contract governance, in which he focused on commercial contracting and concluded: “The efficient organization of economic activity entails matching governance structures with  transactional attributes in a discriminatory way”. In current terminology, that means transactions must be segmented based on specific characteristics (such as risk, value and uncertainty)and then a variety of contract management methods must be available to support them.

A serious gap

IACCM research has identified the continued absence of sophisticated segmentation techniques  as lying at the heart of contract value erosion. Essentially, contract governance is at best partial in its coverage, with the greatest maturity applying to relatively low value and / or high frequency transactions. While these are important for efficient and reliable operations, they are rarely critical. When it comes to longer term or strategically important relationships, contract governance is rarely well defined or managed.

This matters for many reasons. It results in cost overruns, delayed or missed revenues, massive increases in transactional cost, contentious relationships and potential reputational risk. Yet while so many of these damaging issues could be avoided, traditional approaches remain intact, often resulting in inadequate supplier selection techniques, inappropriate forms of contract, value-eroding negotiations and poorly defined and equipped post-award operational teams.

Addressing the problem

Not all is doom and gloom. As with any problem, the initial challenge is to gain recognition that it really is a problem. Then comes the need to demonstrate it can be fixed. In the case of contracts – just like corporate governance – the big issue is the enormity of action required. Contracts and their performance permeate just about every corner of the business – as well as the counter-party’s business and potentially beyond. There is no ‘owner’ of contract governance in today’s corporations – it’s just too complicated.

But change is in the air. Executive awareness is growing and emerging technologies are starting to offer the critical components needed to drive integrated data flows, to provide on-demand information and knowledge – in short, to deliver a backbone that supports the mapping and implementation of differentiated contract governance structures.

As the world’s only non-profit association for contract and commercial management, IACCM has spent years researching and designing improved methods. Unique in its worldwide coverage and integration of both buyer and supplier perspectives, it has been able to develop ideas and methods that truly enable rapid and major advances in contract governance. These are exciting times!

 

Brexit: a classic in how not to negotiate


Negotiating something as fundamental (and emotive) as Brexit was never going to be easy. In the end, it has turned into a fascinating case study that will doubtless be used and cited for decades to come.

What happened to BATNA?

Establishing a ‘best alternative to a negotiated agreement’, or BATNA, is a well established principle in every negotiation handbook. It is fundamental to each party’s power. So what happened with Brexit? In their wisdom – or perhaps determined to undermine the process – the UK Parliament promptly removed any possibility of a BATNA by insisting that there must be a negotiated agreement.

Any incentive that the EU may have had for meaningful negotiation was thereby removed.

And what about stakeholder management?

A second key to successful negotiation and a positive outcome is to understand and manage stakeholders. In the case of Brexit, this was perhaps an insurmountable task, given the multiplicity of agendas that needed to be considered. This was again evidenced by the UK Parliament where three years of debate yielded plenty of insight to what they didn’t want and very little on what they did want. Again, scarcely a backdrop for effective negotiation and not a credit to the democratic process.

In the EU, stakeholder management is a process of building internal consensus through compromise – a process that results in little flexibility and a culture of last minute decisions.

A lack of vision

Ultimately, the big problem with Brexit is the absence of vision. Without a meaningful goal, it is impossible to unite people in its achievement or to undertake a mutually acceptable negotiation. On this score, both the EU and the UK are at fault. It was in both party’s interests to establish a vision for the future relationship and the positive aspects this might bring, but neither could bring themselves to this level of maturity. Ironically, it was this very issue of ‘lack of vision’ that in my opinion led to the Brexit vote in the first place.

But that is another story!

 

 

Price isn’t everything


In many cases, organizations continue to make purchasing decisions based on price. It has been baked into their DNA, with the mantra of ‘commoditization’ backed up by software that drives price-based competitive auctions and measurement systems that continue to monitor ‘negotiated savings’. In the public sector, this is further reinforced by public procurement rules that blithely ignore concepts of value and have failed to adapt to the nature of today’s supply requirements.

Many claim otherwise

Suggestions that procurement decisions remain focused on price are often met with howls of protest and claims that such an approach is a thing of the past. In some cases, this is true – there are Supply Management groups which have moved on and many who advocate the need for change. Yet supplier experience continues to attest that those who have actually changed are very much the exception.

Why is this a problem? 

Simply put, purchasing decisions need context and it is rarely true that price is everything. The commoditization craze that came with reverse auctions and spend management discouraged the use of economic judgment – essentially, it resulted in economic illiteracy. A great example of this was cited in a recent edition of Talking Logistics, which examined the influence of networked technologies on the logistics industry. It made the point that, during the dot com era, many believed that they could convert a traditional relationship-based industry into a spot market commodity. They were wrong. The article highlights how similar efforts are now appearing as a result of digitization. In both cases, these are driven by the hunger for lower prices, but illustrate two fundamental misjudgments:

1) creating a spot market does not necessarily alter the availability of supply and is more likely to reduce competition over time than to increase it;

2) low prices frequently do not translate to low cost. For example, reliability and quality of collection, shipping and delivery frequently has far greater importance than saving a few dollars in processing costs. A failed delivery may well catch the CEO’s attention; a nominal ‘saving’ certainly will not.

So what’s the answer?

Procurement decisions need context. They must examine impacts that stretch beyond the acquisition and explore downstream effects. I recall a great story from the public sector, where a buyer thought it would be a marvellous idea to save money in the criminal justice system by supplying gaols with fruit that had failed the supermarket tests of homogeneity. It seemed entirely logical – saving money and the environment – until it caused a prison riot due to the inequitable size of portions!

With the growth in the scale and types of acquisition, in particular the shift towards services, procurement decisions need a new and economically-based approach to sourcing decisions and supplier management. ‘Price’ must be put in its proper place – and my next blog will expand on how that should be achieved.

Commercial Management: a career with a future?


Over 60% of those working in Commercial Management are excited by the impact and potential of new technology. They believe they can harness its power to better understand and mitigate risks and to increase their influence with senior management.

This welcoming and confident attitude is encouraging and at odds with some other professional groups, who tend to see technology more as a threat. Similar optimism is reflected in the fact that 85% see the current and future job market for their skills as ‘fair to good’ and a high proportion are also confident that they know what future skills they need.

Not all is roses ….

The work of a commercial professional is challenging; they are motivated by the contribution they make to business goals; they love negotiating. But most are somewhat frustrated by the limited career path and opportunities, meaning a significant proportion either plan to change company or change jobs in the next 5 years. Over 40% feel that their current organization fails to invest in its people; over 30% are unhappy with company culture and a similar percentage are dissatisfied with their current pay.

In the context of training, a fascinating statistic is that more than 50% feel the ready availability of knowledge and information, driven by networked technology, means there is now a GREATER need for structured training programs. Clearly a case of too much information becoming overwhelming.

This data is extracted from IACCM’s current Talent Survey and reflects just a small portion of the insights being generated. To participate in this study (and receive a copy of the resulting report) visit https://iaccm.fra1.qualtrics.com/jfe/form/SV_73XH9Gj76yAEk3b

Commercial Managers in the digital age: keys to success


At its heart, commercial management is about grasping the big picture, seeing connections, developing practical solutions. On one level – the availability of information – the digital age is streamlining and simplifying the commercial manager’s role. On many others, it is potentially making it more complicated, or at least very different from the past.

What are the issues?

A recent book put it like this: “Complex trends in globalization, demographic shifts, and new technologies are raising urgent challenges for managers on an everyday level. Because of the number of companies undergoing digital transformation, managers need to navigate an intense speed-to-market landscape while juggling virtual teams within and sometimes outside their organization“.

And this means ….

Commercial managers must not only identify the risks and challenges from this fast-moving environment, but also – and this is critical – innovate, offer creative solutions. Fundamental questions in a digital world are how to innovate, develop new ideas; how to influence and gain insight from both physical and virtual teams; how to communicate and drive change across extended ecosystems. In themselves, the questions are not new. It is the scale and speed that makes things different.

Keys to success

A growing volume of research points to the critical role of communication style and ‘managing your network’. High performing commercial managers unite teams around a clear and shared sense of purpose – not just what they are trying to achieve, but why. They generate an environment where ideas and positive challenge are welcomed and where collaboration is understood, expected and achieved. They are comfortable operating across extended networks, internal and external, both to gather information and achieve results.

At the same time as the digital world imposes these demands, its effective use also makes it possible. Today, there is no excuse for being information deprived; there is no excuse for failing to establish connected networks; there is no excuse for failing to master diverse communication techniques; there is no excuse for lacking self-awareness and influencing skills. These are simply critical attributes for a Commercial Manager.

Communication – the final barrier

Finally, what about communication style and content? As recent conference delegates know, this is an area where IACCM has been doing a lot of research. Working with academics at UC Irvine, we have examined a large number of ‘commercial’ personnel – lawyers, contract and procurement managers. Many are not today exhibiting the critical communication style required to be a commercial leader or influencer. Rather than projecting themselves as enablers, they are seen as ‘preventers’ – safeguarding what we already have, rather than enabling opportunities for the future.

Not everyone wants to be a Commercial Manager, but for those who do it is critical that they understand and grasp the implications and needs of working in the digital age. A good place to start is in shifting personal and team image by challenging and, where necessary, changing what and how we communicate.

IACCM offers its members tools to analyze current communication style and provides methods to establish the new approaches needed for individual and functional growth.

Energy in crisis: some commercial realities


Energy supplies are fundamental to the functioning of any advanced economy, so blackouts such as that which occurred on a large scale in the UK earlier this month are bound to be big news. However, they should be no surprise.

First, it is important to note that the UK is not alone in facing major challenges in its energy supplies. Inadequate investment, the wrong investment, major policy shifts, failure to control demand – all of these are factors which, in varying combinations, have put energy supply into a state of crisis in multiple countries.

The response 

On such a critical and politically sensitive topic there is of course no easy answer. Experts such as Lord Redesdale, CEO of the UK’s Energy Management Association, has been warning about collapsing and inadequate infrastructure for at least a decade. And even if anyone had been listening, the time it takes to bring new supplies on stream would mean that investment in infrastructure is only ever part of the solution.

Today, the commercial considerations are further clouded by extensive debates over the environment and sustainability. Which energy sources do we really want to support? How much energy do we really want to produce? Impact assessments take many forms and are subject to multiple viewpoints. For example, wind farms may be ‘clean’, but they are often unwelcome due to their other environmental effects – and, as incidents and reviews such as those in Australia and Germany show, may not be a reliable or cost effective solution. Another question relates to the move from centralized grids to distributed energy. This is rather like the technology transition when businesses moved from mainframes to distributed computing; it raises big questions over the scale and timing of investment shifts and also is accompanied by new sources of supply and new entrants to the market (e.g. the move by Shell to become an electricity provider).

Demand management is another critical issue. The commercial challenge is not just about increasing supply, but also (perhaps more importantly) raising efficiency and reducing demand. That requires not only greater awareness on the part of users, but also commercial incentives for producers. There is some progress in this area, particularly around effective control and monitoring systems and potential advances in the Internet of Things. Perhaps we will also see faster progress in improved contracting models, such as shared benefit or shared savings agreements that accelerate deployment of advanced technologies. Meaningful consumer education is also an important topic, since ‘consumer concern’ has not translated into ‘consumer self-control’.

And then there is politics 

Given the sensitivities around energy costs and reliability, it is inevitably an area for extensive political debate. Whether or not it directly controls the industry, government has a big role. It sets policies, it often regulates prices, it influences the nature and extent of competition. Factors such as these keep energy at the forefront of debate and always leave lingering questions over whether there can ever be such a thing as open, meaningful competition. From a truly commercial perspective, doesn’t a competitive market actually result in massive duplication of effort and resources, multiplying stakeholders and leading to inefficient allocation of funding and investment?

i am no expert on energy supply, but it is clearly an area that demands the highest level of commercial expertise and assessment – and therefore a field where IACCM is becoming increasingly active.

Supplier-led innovation: fact or fantasy?


At present, supplier-led innovation appears to be more fantasy than fact. That’s the conclusion we must draw from an IACCM Research report, published last week. It shows a significant divide between the aspirations expressed by buyers and the reality experienced by suppliers.

What’s going wrong?

There is wide agreement that supplier-led innovation is both possible and desirable. There are, of course, some great examples of it occurring. But it is the exception rather than the norm, in spite of the efforts of many customers who insert ‘innovation clauses’ into their contract, in the rather forlorn hope that this may cause something to happen.

Part of the problem is that ‘innovation’ is frequently not well defined. For example, is it innovation at a global level, or within an industry, or just in the context of the specific customer? And how does ‘innovation’ differ from ‘continuous improvement’?

However, more severe than this issue is the fact that most organizations have not established any form of innovation process or protocol. There isn’t a formal structure for review or to generate funding or to determine how risks and benefits will be shared. This is a source of frustration for many suppliers, who feel there is no avenue for ideas to be proposed and evaluated.

innovation needs trust

Finally, there is also a significant trust barrier. However much Procurement groups may claim they have changed, the experience of most suppliers is that bid selection processes remain dominated by lowest price and risk allocation. Quite simply, they do not trust the underlying integrity and sense of fairness in many of their customers. In those where trust prevails, innovation flourishes.

The IACCM report, compiled through surveys and interviews and authored by a group of academics and practitioners, provides guidance and methodology to those who really seek supplier-led innovation. It happens, but only when the environment is right.